New research suggests a hub airport (eg. Thames estuary) for London cannot be built without public subsidy

Date added: January 25, 2013

A report by the economic consultants, Oxera, commissioned by the Commons Transport Committee has shown that a massive hub airport in the Thames estuary would only be viable if it had a subsidy, from UK taxpayers, of some £10 – 30 billion (in today’s money). Oxera looked at various scenarios, and found that otherwise such an airport would not be viable or provide the sorts of returns that a private investor would require. Depending on the airport’s design, it could cost £20 – £50 billion. The potential impact on Heathrow and other airports – and necessary compensation – were had to be taken into account, and would have an impact on a new hub airport’s commercial viability. Transport committee inquiry chairman Louise Ellman said: “The results suggest a new airport would require public investment and have considerable impact on Heathrow and other London airports. The research findings also shed significant light on the scale of investment required to deliver essential related surface transport links for any new airport. “We hope this work delivers something new to a crucial debate.”

New research suggests a hub airport for London cannot be built without public subsidy

24 January 2013

Under most scenarios, expected revenues from a new hub airport for London would be less than the expected costs of construction, and the development of such a facility would not be commercially viable without substantial support from the taxpayer, says new research conducted by economic consultancy Oxera for the Transport Select Committee.

Publishing a report setting out the findings of research commissioned for the Transport Committee inquiry into the Government’s aviation strategy, Committee Chair, Louise Ellman MP said:

“We asked Oxera to develop a set of questions for the Committee to use to probe the evidence put forward by witnesses to our Aviation inquiry. This work was framed specifically to help the Committee assess the commercial viability of a new hub airport by asking whether any future owners could make adequate returns sufficient to obtain finance.

The results suggest a new airport would require public investment and have considerable impact on Heathrow and other London airports. The research findings also shed significant light on the scale of investment required to deliver essential related surface transport links for any new airport.

We hope this work delivers something new to a crucial debate. It doesn’t provide answers but it does set out in a systematic way which areas of questioning the Davies Commission must address and answer fully.”

The questions highlighted in this research will now inform the work undertaken by the Transport Committee when they take further oral evidence for the Aviation Inquiry. The next session takes place on Monday 28 January with diverse witnesses including those involved with and opposed to the development of hub airport proposals.

Background notes

The Oxera methodology makes reference to a number of specific hub airport proposals, but focuses only on the overall rationale for the concept of a new hub and does not evaluate any or each proposal in detail. This ‘proposal-neutral’ approach means that revenue and cost estimates set out in the research findings have been calibrated using broad conceptual numbers, rather than proposal-specific estimates.

The analysis developed by Oxera includes:

Scenarios taken from primary sources that address demand, airport and surface access construction costs, and landing charges are all used as objective inputs to model the expected cash flows associated with a new hub airport.

A range of designs for any new hub airport, covering aspects such as the number of runways and policy options towards existing airports.

The Oxera research does not examine whether government support for such an airport would offer good value for money. Nor does it attempt to offer a full social or environmental cost benefit analysis.

The results of this research should not be considered on a stand-alone basis since this work has been commissioned within the context of wider UK aviation policy and in line with the goals of the Transport Committee’s inquiry.

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Up, up and away! New London airport would need up to £30bn public subsidy

MPs asked if any future owners could make adequate returns sufficient to obtain finance

24 JANUARY 2013 (Independent)

A new hub airport for London would need public subsidy of up to £30 billion, according to new figures published today.

A Commons Transport Committee-commissioned report found that a “substantial” subsidy would be needed.

The MPs wanted to find out if a new hub airport to increase capacity to south east England would be commercially viable for a private investor. They asked if any future owners could make adequate returns sufficient to obtain finance.

Researchers for the economic consultants Oxera found: “Specifically all the scenarios have a negative value at a rate of return that a private investor would require and the analysis implies that substantial public support/subsidy would be needed (in the range of £10-30 billion in today’s money for the base-case scenarios examined).”

The report adds that the project could still offer the public good value for money “depending on the scope of the wider benefits that the airport could facilitate”.

Different potential situations in which that would have a direct impact on costs were looked into. These included airport design and the number of runways, demand forecasts and construction cost estimates which range across various proposals from £20-£50 billion.

Oxera considered various hub scenarios, rather than any of the actual plans which have been put forward. Researchers did not look in detail at the expansion of existing airports.

The potential impact on Heathrow and other airports were also imagined as this would also have an impact on commercial viability. Compensation to Heathrow needed to be arranged in scenarios where it had to close. Landing charges plus operating costs, all based on current Heathrow usage figures, were also viewed. Policy options towards existing airports was another factor.

The closure of Heathrow was among the potential situations imagined by the researchers which would influence financial viability and demand.

If Heathrow closed, all its traffic would move to the new hub airport. If Heathrow stayed open, the new airport would soak up all unmet traffic and attract some of Heathrow’s existing demand.

Forecasts also suggested there could be “a degree of diversion” from London airports to the rest of the UK due to capacity constraints at the London airports.

Researchers also assumed that if there was no capacity constraint at the new hub then the airport could cope with unlimited demand growth.

Transport committee inquiry chairman Louise Ellman said: “The results suggest a new airport would require public investment and have considerable impact on Heathrow and other London airports.

“The research findings also shed significant light on the scale of investment required to deliver essential related surface transport links for any new airport.

“We hope this work delivers something new to a crucial debate.”

The MPs are set to use information in their ongoing examination of aviation policy.

The report did not look at whether Government support for a new hub would offer good value for money or to suggest what the overall social and environmental benefits could be.

The Institute of Directors urged a comprehensive overhaul of aviation policy, including the construction of new runways at Heathrow and Gatwick Airports.

Corin Taylor, the IoD’s senior economic adviser, said: “This analysis confirms our view that a new hub airport would need substantial public subsidy and probably require the closure of Heathrow.

“Expanding our existing hub airport would be cheaper, quicker and offer far better rail and road connections to the rest of the country.”

Boris Johnson supports Stansted hub as ‘easiest’ solution

Stansted airport emerged as Boris Johnson’s favoured option for a new international hub for the South-East today.

Sources close to the Mayor admitted he accepted expanding the Essex airport would be “the easiest” way to increase aviation capacity.

It comes after a major report claimed yesterday his proposal for an airport in the Thames Estuary was not “commercially viable”.

Today Mr Johnson criticised the “panda-like pace” at which the Government was coming up with a solution and again rejected Heathrow expansion.

He said: “I urge leaders of UK business now to look at the extraordinary potential of the alternatives either at Stansted or at the two estuary sites that, with sufficient political will, could be delivered on roughly the same timescale as the third runway at Heathrow and would be very largely financed by some of the international investors at Davos today.”

However, City Hall sources acknowledged that Stansted increasingly looked like the front runner to get the Mayor’s backing. He has been creeping slowly closer towards supporting expansion of the Essex airport since he first raised the prospect in a major aviation speech last autumn.

Speaking in Davos, Mr Johnson added: “We need a new 24-hour hub airport with four runways so that we can properly compete with our continental rivals and let me assure you that the expansion of Heathrow is a delusion and a disaster. We cannot understand the panda-like pace with which the Government is addressing the problem. See you in London — when you get clearance to land.”

A report by the Commons Transport committee highlighted the risks of the Mayor’s Thames Estuary airport idea to private sector investors as the project would rely on higher passenger numbers or heftier charges.

But it concluded that building a hub airport instead of expanding Heathrow could still offer “good value for money” if it led to significant economic benefits for Britain.

It comes as a leading architect said the solution to the South-East’s aviation crisis lay in creating a “hub-city” rather than a “super-hub” airport. Eden Project designer Grimshaw is the latest firm to throw its hat into the ring with a scheme to expand capacity.

Unlike most of the other projects on the table, chief executive Jolyon Brewis has suggested splitting capacity between a number of existing airports. At the same time, he proposes encouraging transfer passengers to spend their time between flights travelling around the city on an Oyster-type card.